Online sales restrictions are anti-competitive says Competition Appeals Tribunal

Introduction

Ping Europe Limited (Ping) is a UK manufacturer of golf clubs and golfing equipment. Ping has for many years operated a selective distribution network for its clubs, and supplies only authorised retailers which meet certain qualifying criteria. Ping’s online sales policy prevents its authorised retailers from selling its clubs online with the stated aim of promoting dynamic face-to-face custom fitting of its clubs, which cannot take place online. It is interesting to note in this case that Ping’s emphasis on the face-to-face custom fitting process predates the advent of the internet and retail sales through e-commerce. Ping’s terms and conditions of sale impose an obligation on retailers to accept and adhere to Ping’s face-to-face fitting policy and to do everything reasonable to persuade the consumer of the benefits of having such a fitting (which includes any orders placed over the telephone).

The CMA’s infringement decision

In general, agreements that prevent, restrict or distort competition are prohibited under the ‘Chapter I Prohibition’ (Section 2 of the Competition Act 1998) where there is a significant effect on trade in the UK, and under Article 101 of the Treaty on the functioning of the European Union (TFEU) where there is an effect on trade between Member States of the EU, unless an exemption applies. An outright ban on online sales, as Ping had required of two or its authorised retailers in the present case, is generally considered a ‘hardcore’ restriction on passive sales to end users which is not capable of being block-exempted under the Vertical Block Exemption Regulation (‘VBER’). In August 2017, the CMA found that Ping had breached the Chapter I Prohibition and Article 101 by preventing its retailers from selling on their websites and that the ban did not benefit from any exclusion or exemption.

Ping had argued that its restriction on online sales was objectively justified because it promoted the legitimate aim of custom fitting and preserved its brand image. Although the CMA agreed that Ping’s online sales policy was motivated by a ‘genuine commercial aim’, it concluded that the ban was disproportionate and that Ping could have achieved its commercial aim by adopting less restrictive ‘alternative measures’ which would not have resulted in a serious restriction of competition. Such measures could have included prominent website notices recommending a custom fitting and a live sales agent chat facility, for example.

In the CMA’s analysis, the online sales ban reduced the ability of retailers to reach customers outside of their geographical area and to win new business by offering better prices online. It is interesting to note that in reaching its decision, the CMA considered how Ping’s competitors promoted custom fittings whilst allowing online sales, and how Ping itself allowed its retailers in the United States to sell online.

The CMA ordered Ping to remove the ban on the two affected retailers, not to impose the same or equivalent terms on any other retailers, and to pay a fine of £1.45 million.

Ping’s appeal is dismissed

Ping appealed the CMA’s decision, contending that face-to-face fitting is the best way to enhance customer choice and that the CMA had been wrong in concluding that the restriction was disproportionate, was not objectively justified, and did not benefit from an individual exemption. Ping sought to introduce new evidence which was not placed before the CMA during its investigation relating to the ‘alternative measures’ which the CMA concluded could achieve Ping’s commercial aim.  Ping also asserted that the CMA’s decision breached its rights under the European Union Charter on Fundamental Rights, as it forced Ping to sell a product (non-custom fit clubs) which it did not wish to sell.

The CAT rejected Ping’s arguments and broadly upheld the CMA’s findings.  In dismissing the Appeal, the CAT also reduced the penalty imposed on Ping by £200,000 to £1.25 million, on the basis that it considered the CMA was wrong to treat director involvement as an aggravating factor. In lowering the penalty, the CAT concluded that Ping had not set out intentionally to restrict competition and so the lower revised fine was fair and proportionate.

Conclusions

This landmark decision in the UK sends a clear and important message that attempts by manufacturers to impose absolute bans on selling their products online will fall foul of competition law.  As an important competitive sales channel, manufacturers will need to demonstrate good reasons, for example relating to health or safety, if restrictions on internet sales are to avoid being considered anti-competitive. Even under a selective distribution agreement it is usually only possible to impose a ‘bricks & mortar’ requirement and not an outright ban on online sales.

In essence, if a restriction or prohibition is objectively justifiable, it will be acceptable and fall outside the scope of section 2 or Article 101(1).  Where this is not the case, an assessment must be made as to whether the restriction of competition is the object of any agreement, or by the effect of the agreement.  In which case, an individual exemption must be considered if the parties are to avoid penalties.

The approach of both the CMA and the CTA is consistent with decisions taken by competition authorities throughout the EU and suggests that the UK’s strict approach to online sales restrictions is unlikely to change following Brexit.

It is interesting to contrast the decision in Ping with the decision of the CJEU in Coty Germany (C-230/16).  In this case, while the CJEU outlawed outright bans on online sales, it held that a prohibition on sales on third party internet platforms (such as Amazon and eBay) in the context of a selective distribution system may be acceptable if certain conditions are met because such a restriction is not considered ‘hardcore’ and is capable of being block-exempted under the Vertical Block Exemption Regulation.

Finally, it is noteworthy that the CMA did not impose any penalties on the retailers with whom Ping entered the infringing agreements.  However, retailers should be mindful that they can also be fined for entering into agreements containing anti-competitive restrictions with suppliers.

It is not known at the time of writing whether Ping intends to appeal the CAT decision.

The CAT’s judgment can be read here.